Dr Reddys Laboratories Ltd Q4 FY2023 Earnings Call

Good day, everyone, and welcome to the Dr. Reddy's Q4 FY '23 Earnings Conference Call. I will now turn the conference over to Ms. Richa Periwal. Thank you, and go ahead, ma'am.

Thank you. A very good morning and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the quarter and full year ended March 31, 2023. Earlier during the day, we released our results and they are all supported on our website. This call is being recorded, and the playback and transcript shall be made available on our website. All the discussions and analysis of this call will be based on the IFRS consolidated financial statements. The discussion today contains certain non-GAAP financial rates. For a reconciliation of GAAP to non-GAAP measures, please refer to our press release. To discuss its performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Gunupati Prasad, our Co-Chairman and Managing Director; Mr. Erez Israeli, our CEO; Mr. Parag Agarwal, our CFO; and the entire Investor Relations team. Please note that today's call is a proprietary material of Dr. Reddy and cannot be rebroadcast or attributed in press or media outlet without the company's express consent. Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's release also pertains to this conference call. Now I hand over the call to Mr. Gunupati Prasad. Over to you, sir.

Thank you. Thank you very much. Good evening, and good morning to all of you. Welcome to the annual earnings call. I'm delighted to detail today along with the members of the executive team. As you may have seen in our published results, this year has been an outstanding year for the company, a year in which we set records in our reported sales, profits, and generated a healthy cash flow. We continue to strengthen our core businesses while investing in building businesses of the future. Our sustained investments are aimed at driving manufacturing excellence, strengthening our pipeline, and continuing to build efficiency and productivity in our R&D as well as operations. Looking beyond the financial performance, during the year, we made great progress on multiple fronts, and we were recognized for these achievements. We were recognized by CNBC TV18 under the Masters of Risk in the Care & Pharma segment. We also secured leadership from CDP for action on climate change and supplier engagement. We featured in the Bloomberg Gender Equality Index, the S&P Global Sustainability Yearbook, the DGSI Sustainability Index, and emerging markets category, and we were awarded by the Economic Times as one of the best organizations for women in 2023. Our largest filed dosages factory was recognized by the World Economic Forum as part of its global lighthouse network. These recognitions are an endorsement of our commitment to building a sustainable, high-performance organization focused on the needs of patients. I am excited about how far we have come in the past few years and the opportunities we have for the future as we continue to make efforts to bring to life our credo: health can't wait. So with this, I'd like to hand over the call to Parag for taking you through the financial performance of the company.

Thank you, Prasad. Greetings to all of you, and I hope all of you are doing well. I'm delighted to take you through our results for the quarter 4 and full year of fiscal 2023. FY '23 has been a year of strong financial performance with the highest level of sales, record profitability, and robust cash flow generation from operations. Let me provide you with a quick rundown of our Q4 and FY '23 financials. For this section, all the amounts are translated into U.S. dollars at a convenient translation rate of INR 8.19%, which is the rate as of March 23. Consolidated revenues for the quarter stood at INR 6,297 crores, that is USD 766 million, and grew by 16% on a year-on-year basis and declined by 7% on a sequential quarter basis. Year-on-year growth was driven by growth in both generics and PSAI businesses, further augmented by the income from divestment of a few non-core brands in India. Quarter-on-quarter decline was primarily due to sales volatility in the energy business. The revenue for the financial year 2023 stood at INR 4,588 crores, that is USD 2.99 billion and grew by 15%. The growth was mainly driven by new product launches, partly offset by price erosion. Consolidated gross profit margin for this quarter was 57.3%, an increase of approximately 430 basis points over the previous year, a decline of 210 basis points on a quarter-on-quarter basis. Year-on-year increase was driven by new product sales with higher gross margins and favorable foreign exchange. Quarter-to-quarter decline was primarily due to product mix and lower operating leverage, also partly offset by divestment income. Gross margin for the Global Generics and PSAI were 61.7% and 25.2% for the quarter. Gross margin for FY '23 has been 56.7%, which is an increase of 360 basis points over FY '22. The increase was driven by new product sales with higher gross margin, high government incentives, and favorable foreign exchange, partly offset by the impact of price erosion. Gross margin showed for global generics and PSAI were at 52.1% and 16.2% for the year. The SG&A spend for the quarter is INR 1,799 crores, that is USD 219 million and increased by 15% year-on-year, but it remained flat quarter-on-quarter. The year-on-year increase is largely due to sales and marketing investments and adverse impact from Forex translation. The site spend for the year is INR 6,803 crores, that is USD 808 million and has grown by 10%. The SG&A cost as a percentage to sales was 7.7% and is lower by 130 basis points over the previous year due to better operating leverage. The R&D spend for the quarter is INR 57 crores, that is USD 65 million and is at 8.5% of sales. Our R&D efforts are focused on building a healthy pipeline of new products across our markets, including biosimilars. The R&D spend for FY '23 is INR 1,938 crores, that is USD 238 million. R&D percentage to sales for the year stood at 7.9%. The EBITDA for the quarter is INR 1,631 crores, that is USD 198 million, and the EBITDA margin is 25.9%. The EBITDA for the year is INR 7,308 crores, that is USD 890 million for the year, increased at 29.7%, which is ahead of our aspirational target of 25%. Our profit before tax for the quarter stood at INR 1,326 crores, that is USD 161 million, and that for the year stood at INR 6,037 crores, that is USD 734 million. Our profit before tax for the quarter grew by 434% year-on-year, and for the year, it grew by 87%. The effective tax rate has been at 27.6% for the quarter and at 25.3% for the year. The effective tax rate was lower in FY '23 largely due to changes in the company's mix of earnings. We expect our normal ETR to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 929 crores, that is USD 117 million, and that for the year stood at INR 4,507 crores, that is USD 548 million. Reported EPS for the quarter is INR 7.62 and that for the year is INR 27.85. Operating working capital reduced by INR 54 crores, which is USD 44 million against that on December 31, 2022, mainly supported by an improvement in receivables. Our capital investment stood at INR 258 crores, which is USD 31 million in this quarter and INR 1,132 crores, which is USD 138 million during the year. The free cash flow generated during this quarter was at INR 1,596 crores, which is USD 194 million. The free cash flow generated during this year was at INR 4,009 crores, which is USD 488 million. Consequently, we now have a net surplus cash of INR 5,046 crores, that is USD 640 million as of March 31, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 774 million, largely held around the range of INR 32.4 to INR 84.5 to dollar 730 million at the rate of INR 1.045 to the ruble and USD 4.2 million at a rate of INR 57.8 to USD 7 maturing in the next 12 months. With this, I now request Erez to take you through the key business highlights.

Thank you, Parag. Good morning and good evening to everyone. As Prasad highlighted, we have delivered strong financial performance in FY '23. We closed the financial year with double-digit top line and bottom line growth, with EBITDA and ROC margin exceeding the 25% level. This impressive performance was reflected in our cash flow, and we continue to have a strong balance sheet. We progressed well on our strategic priorities, and we are able to invest in our organic capabilities and business development opportunities to thrive and deliver on our purpose over the long term. Let me take you to some of the key highlights for you. One, we witnessed underlying growth momentum in FY '23 across all businesses, adjusted for COVID products contribution during this year. Two, revenue in North America generics and branded markets crossed the $1 billion mark for the second consecutive year. Three, we divested certain non-core brands in India to focus on strengthening the core. Our EBITDA is at 30%, and our ROCE is at 35%. We generated strong free cash flow leading to a net cash surplus of $640 million. We also see positive momentum on BD/M&A with the acquisition of a brand into India, our main pharma U.S. generic prescription product portfolio, and branded and generic injectable products in the United States. Significant progress was also made in our biosimilar businesses. We see the launch of a biosimilar still event, which is already marketed by Fresenius Kabi in the U.S. We completed and saw the completion of clinical studies of rituximab biosimilar and already filed in the U.S., Europe, and the U.K. MHRA. We saw the completion of Phase I studies for a biosimilar tocilizumab, and a global Phase III study was initiated. Recently, we received approvals for 3 products in China, namely Sevelamer, Sildenafil, and Carboprost along with our partners. We are also progressing well in our digitalization as well as our ESG journey. Our diversified global presence, capability, and strong balance sheet make us the partner of choice. We continue to work towards strengthening our position as a partner of choice including in biosimilars. From a Horizon 2 perspective, we signed some strategic license deals in Horizon 2, including collaborations for cardiac care wearable devices and management of migraine. We see potential in biosimilars tobring Tocilizumab to other markets. We are investing in trial development of these biosimilar assets in keeping with our stated horizon strategy. Now let me take you through the key business highlights for Q4 and FY '23. Please note that all references to the numbers in this section are in respective local currencies. Our North America Generics business recorded sales of $312 million for the quarter with a strong growth of 18% year-over-year and a 7% decline on a sequential basis. On a full year basis, we recorded sales of $1.68 billion with a growth of 26% over the previous year. This growth is largely led by new product launches such as lenalidomide, sorafenib tablets, and Tobramycin, along with growing market share in certain existing products. We launched 16 products during the quarter and overall, 25 products during the year. We expect the launch momentum to further improve in FY '24. Our Europe business recorded sales of $56 million this quarter with a year-over-year growth of 7% and sequential quarter growth of 9%. On a full year basis, the sales of €210 million have grown by 9%, driven by base business volume and new product launches. We launched 5 new products during the quarter across all markets and expect this transformation to continue in FY '24. Our emerging markets business recorded sales of $1,114 million with a year-over-year decline of 7% and a sequential quarter decline of 15%. On a full year basis, emerging market sales have been roughly flat at INR 4,550 crores. However, the sales have grown 13% adjusted for COVID-related products and divestment income in FY '22. We launched 10 new products during the quarter and 94 new products during the year across various countries in the emerging markets. Within the EM segment, the Russia business saw a decline of 34% on a year-on-year basis and 17% on a quarter-on-quarter basis in constant currency. In FY '23, Russia business declined by 9% in constant currency, attributed to the divestment of a non-core brand during the previous year. During the year, there has been normalization in channel customer stocking levels after the high volumes in FY '22. We have been navigating the evolving geopolitical uncertainties and managing currency fluctuations effectively. Our India business recorded Q4 sales of INR 1,293 crores with a year-over-year growth of 32% and a sequential increase of 14%. On a full year basis, our sales were INR 4,893 crores, reflecting a growth of 17%. Excluding the benefit of the divestment income and adjusted for COVID-19-related products, year-over-year sales growth for the quarter has been 11%, and for the full year has been 13%. According to IQVIA, we are ranked #10 in the India market. India remains our priority market, and we are committed to continue to grow this business at a healthy rate. Our PCI business recorded sales of $95 million with a decline of 4% year-over-year and flat sequentially. On a full-year basis, the sales were $362 million with a decline of 12%. The decline was primarily due to the high base effect of COVID-related products. We expect this business to grow in the near term. Our R&D efforts are focused on developing value-accretive products, including several generic injectables and biosimilars. We have done 195 global generic filings, including 12 ANDAs filed in the U.S. During FY '23, we are on track to accelerate these efforts in FY '24. We are making significant progress in the development of our biosimilar products and working on some horizon 2 initiatives. Our strong balance sheet provides us with financial flexibility to support future growth, invest in business development opportunities, and we will continue to maintain a disciplined approach to cash management and acquisitions. We will remain focused on strengthening our core generics and API business and building a strong foundation for the future. We are building a pipeline of products to meet the evolving needs of patients and healthcare professionals through investment in internal R&D as well as strategic acquisitions. With this, I would like to open the floor for questions and answers.

The first question is from Balaji Prasad from Barclays.

Just wondering if you could provide a bit more detail around your deals just discussing what the responsibilities will look like on both ends. And just what convinced you about their asset and its potential?

Balaji, we were not able to hear you well. I'm afraid you will have to repeat the question. Can you repeat, please?

Sure. Is this better? Can you hear me better now?

Yes.

I was just wondering if you could provide a bit more detail around your deal with certain firms just discussing what responsibilities will look like on both ends. And also just wondering what convinced you about just their asset and its potential.

So strategically, we are looking for partnerships, especially in India. We believe that we are having great dialogue with the innovation industry in China and we are trying to bring products that we believe can provide significant value. We think these products have produced promising results and can be considered substantial in sales, where we can offer them in India at an affordable price compared to alternatives. This is our purpose. We are trying to offer great health solutions at an affordable value, and that's the main incentive behind this group.

The next question is from the line of Surya Patra from PhilipCapital.

Congratulations for the great set of numbers, sir. Sir, my first question is on the U.S. business front. So is it possible to share what the sequential growth in the U.S. would have seen in the current quarter?

So we cannot give guidance on specific products as we are still assessing them. What I can say is that we are seeing consistent growth, and we are likely going to continue to see growth in all of our sectors including the United States. This will be driven primarily by organic activities, specifically for the United States, along with contributions from our recent acquisitions.

Sir, is it possible to give some extra color on the launch momentum that you have mentioned in your opening remarks for the U.S. market, which you believe is strong this financial year?

Yes, I think the investments in R&D, especially on products with slight competition are paying off. We expect that the patent fleet we have will provide valuable opportunities in FY '24 and beyond. That's what I mentioned earlier - we expect 25 to 30 meaningful launches with reduced competition.

Sir, my second question is on the composite question. We have seen strong cash accumulation and simultaneously, we are seeing multiple M&A activities to enhance our focus on the domestic formulation business, which has achieved around 20% of the total revenue base. Could you share your thoughts on capital allocation to build this business in the near future and ultimately, what business mix would you like to achieve for domestic formulation?

Yes, absolutely. In India, our primary growth will come from focusing on our brands. We have identified focus therapeutic areas and brands, and we are doubling down on them by increasing our presence in more cities. The second factor is that we are collaborating with the innovative industry in the United States, Israel, China, and other places, as well as with companies and institutes in India to bring innovation to the Indian market. We're doing this through both our internal R&D as well as external collaborations. Additionally, we are looking for acquisition opportunities where we can add value strategically. Most capital will be allocated effectively across all our business segments. In addition, we are always looking for opportunities for acquisitions. There is nothing that we can report at this stage, but we remain open to this always. For the initial part of capital allocation, we are looking for potential complementary deals in the U.S., Europe, and India.

The next question is from the line of Damayanti Kerai from HSBC.

My first question is on the U.S. business. You have been consistently launching new products. Can you talk a bit more about the kind of price erosion we are seeing on existing products?

The U.S. market structure has not changed in the last quarter. The competitive landscape remains similar, and we are seeing some price erosion this quarter, but less than what we saw in the previous quarters. We are witnessing a better product mix this time compared to earlier.

My second question is, as you continue to invest in your business and long-term growth drivers, how do you see R&D and SG&A costs moving from here on?

We are maintaining the 25% EBITDA margin target as part of our long-term plan. We expect variations in the numbers over time, but we are committed to that long-term target. We are allocating resources toward R&D, and we anticipate R&D costs to be in the range of 8% to 9% going forward.

We have the next question from the line of Neha Manpuria from Bank of America.

On the ROW markets, excluding last year due to COVID impact, have we historically grown that market above 20%-25%. Should we expect that kind of growth to return?

Yes, that's correct. We are aiming for traditional growth rates that we have experienced in the past, and we expect to see growth in those markets as we accelerate product development and filings.

On the India business, could you quantify the divestment income in the current quarter? Additionally, excluding that, how should we look at growth expectations?

The divestment income was INR 264 crores this quarter. We do expect to see more divestments from time to time, but nothing significant is planned at this stage. Our focus remains on growing the product portfolio and enhancing collaborations.

Can we grow in line with the market in India based on our previous efforts?

We believe we can outperform the market.

Lastly, on the Russia business, was there any specific impact from channel inventory being cleared this quarter?

The impact is primarily a base effect. When the conflict started, we observed up stocking. The high base from the same period last year is impacting the year-on-year growth.

Nothing specific happened in this quarter, most of the sequential decline was due to timing of product launches.

The next question is from the line of Ankush Mahajan from Axis Securities.

What is the sustainability run rate for your U.S. business? How do you see EBITDA margins evolving?

Our product sales may fluctuate in the short term, but we believe they will sustain over the long term. We are targeting to keep EBITDA margins at around 25% for the longer term.

Are there any strategies to improve the base business growth?

I'm optimistic about growth in the market. We've been consistently focusing on our product mix and ensuring we're not just maintaining, but growing in this area.

The next question is from the line of Kunal Dhamecha from Macquarie.

How far along are we in leveraging the U.S. ending portfolio for Europe? What is our outlook?

We see significant growth opportunities in Europe. Our strategy to diversify our product portfolio there is working well, and the future looks promising.

What are the nature of observations on CTO 1? Have we submitted a response to the U.S. FDA?

Yes, it's a minor observation, and we are currently addressing it. We will submit our response within the timeline given by the FDA.

The next question is from the line of Madhav Marda from FI Industries.

With accumulated free cash flow and M&A activity, how do you see the competitive landscape? Is it easy to get good assets?

Our strategy is to pursue opportunities that are strategically beneficial at attractive valuations. Currently, we are focused on complementary assets, and we believe there are good opportunities in the market right now. M&A will remain a focus area, but we are looking for bolt-on acquisitions that can integrate well with our existing operations.

The next question is from the line of Cyndrella Thomas Carvalho from JM Financial.

Regarding the higher volumes in the quarter, will that be reflected next quarter?

We cannot share specific quantities. What is important is that the volume remains meaningful and beneficial for us.

Can you clarify the Chinese product approvals and how they will start reflecting in earnings?

We are expecting significant shipments into China in the upcoming quarters. Our ongoing strategy of submitting all the required products has been aligned for effective entry. The larger impact will be seen by FY '25 and FY '26, but we anticipate steady growth leading up to that.

On the PSI business, we haven't seen top-line growth. How do you see the outlook for this sector?

We will see growth along with higher profitability, as we are launching new products in more territories, especially in Asia. We are also seeing an ease in supply chains, which adds to this positive sentiment. We aim for double-digit growth in this market moving forward.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Given expectations for FY '24 amidst the exclusive launches in FY '23, will we see growth in U.S. sales?

We believe that we will see growth, not just from exclusive products but also from ongoing launches and a stronger mix. Our goal remains to continually improve.

The next question is from the line of Ashish Chopra from IIFL Asset Management.

On EBITDA margin guidance, given a few one-time opportunities, could you share your direction going into FY '24?

I will reiterate our commitment to the long-term target of 25%. We are seeing improvements and are focused on maximizing our portfolio's potential. The strength of our balance sheet allows us to align with market opportunities while supporting growth.

The next question is from the line of Prakash Agarwal from Axis Capital.

You mentioned expecting double-digit growth across markets, including the U.S. Can you confirm if that will be the case for FY '24?

We are focusing on double-digit growth in FY '24, aligning our resources strategically.

Are the conditions favorable for our core business growth?

We are optimistic about our growth outlook, particularly in our core segments, but we cannot predict every quarter’s specific outcomes.

The next question is from the line of Nitin Agarwal from DAM Capital Advisors.

Can you share insights on the portfolio acquired in the U.S. and the growth prospects there?

We believe there are valuable opportunities in this portfolio, particularly in women's health. We have many products in our pipeline and see this as a growth area.

Are we open to further investments into U.S. generics?

We are always open to exploring investment opportunities in U.S. generics, but only if they are complementary to our existing business.

The next question is from the line of Prakash Agarwal from Axis Capital.

Can you confirm that you are targeting double-digit growth, including from the U.S.?

Yes, that is our aim, but I cannot promise it every quarter. Nonetheless, we are optimistic for the fiscal year.

Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to Ms. Richa Periwal for closing comments. Over to you, ma'am.

Thank you. Thank you, everyone, for joining us today for the earnings call. For any further queries, please reach out to the Investor Relations team. Thank you. Have a great day.

Thank you. On behalf of Dr. Reddy's Laboratories Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.